Crashes aren’t the Issue – the Responses of the State are
It is foolishly assumed that all is lost once the stock market crashes. People begin to look left and right for political saviours in hopes of reclaiming their fortunes, which they voluntarily invested knowing the consequences of such an action. As painful as some crashes and slumps may be in an economy, they are simply a fact of life and have been around since the early days of finance – the first one occurring in France thanks to a Scotsman named John Law.
Yet if we briefly look through history, one can see that, regardless of the size of the stock market crash, what really matters is the government’s response to it.
Hoover vs Harding & Coolidge
The most prominent example of such an occurrence is the stock market crash of 1929. When the stock market initially crashed, unemployment levels barely reached 10% and by the summer of 1930 were already down to around 6%. Compared to the roaring 20s, a figure of 6% sounds pretty high, but by today’s standards, especially in Europe, is incredibly low.
Yet the government simply could not let the market adjust itself. Herbert Hoover helped enact two policies which began the US’ road to the Great Depression. Firstly, he spent a good amount of time campaigning against lowering wages. In such hard times, if one were to merely follow the law of supply and demand he would see the fallacy in his argument – if an employer now has less money at his disposal due to the crash but still needs to pay his workers X amount, he can only accomplish this by employing less workers – subsequently increasing the unemployment rate.
Secondly, the Smoot-Hawley tariff act was passed in the summer of 1930, despite a petition against it being signed by 1200 leading economists of the time, which placed import tariffs on 20,000 goods in the hopes of raising revenue. The end result? The unemployment rate never fell below double digits for the next decade. Hoover’s response was significant as it laid the foundation for the New Deal, which exacerbated the crisis even further. Had Hoover done nothing in 1929 and 1930, chances are that the roaring 20s would’ve continued into the 1930s and FDR would’ve stuck to his campaign promises if he were to be elected.
In sharp contrast, ten years prior to Hoover’s attempt to save the economy, Warren Harding faced a similar situation. As a result of the war, the United States was facing massive economic problems – including unemployment and anti-business measures such as high taxes. What most history books do not teach in school is that 1921 had a depression, too, but a very short one. Instead of attempting to fix the economy with all sorts of government directives and additional regulations, Harding did the opposite – he slashed taxes, cut the budget in half and deregulated the economy.
This set the tone for the next decade, which thanks to president Calvin Coolidge’s and Secretary of Treasury Andrew Mellon’s laissez-faire policies, created the famous roaring 20s – arguably the most prosperous period for the average American citizen. The Revenue Acts of 1921, 1924 and 1926 greatly reduced the tax rates in the country and helped it recover from the most devastating event humanity had hitherto seen – the Great War.
Britain vs Hong Kong in 1945
After World War 2, Britain laid in ruins. The Blitz had wreaked havoc on most major cities in the Kingdom. After the cheery crowds celebrating Montgomery and Churchill had dispersed, Britain faced a serious problem – its cities were crumbling, its people were starving and its soldiers were wounded and exhausted. Instead of toning down war-era controls on the economy, where even citizens were encouraged to contribute their pots and pans to the making of airplanes, it did the opposite – it broadened the scope of government.
Britain said no to Churchill’s re-election and voted for Clement Attlee, the Deputy Prime Minister during the war. New forms of government bureaucracies were created, the health care and several major industries were nationalized and the scope of government increased to cover every part of life – Britain had turned a complete 180 degrees from the days of Blackstone and Bentham of the 19th century. Atlee was a fervent Keynesian who had supported government policies such as full employment and the need for government stimulus.
The effects of this on Britain were as devastating as the Blitz. Colony by colony began to declare independence, wages kept falling and the life of an average Brit had fallen to such levels that reports were stating that by the end of the millennium its citizens would enjoy the same level of prosperity as Communist Albania. The effects of Atlee’s policies and the tone he set for the economy afterwards are quite visible even today; As reported by the Washington Post, if Britain were to become a US state it would be the 2nd poorest – behind Alabama and after Mississippi. It wasn’t until Margaret Thatcher came into office that Britain began to turn against Keynesianism and towards free markets again. The most ironic thing about Clement Attlee is that he was a self-described, fervent anti-communist, yet he nationalized nearly all of Britain’s major industries.
In sharp contrast to its colonial master’s response, Hong Kong did the exact opposite. It was occupied during World War 2 by the Japanese and after it had been liberated in 1945, the British government had sent a Scotsman by the name of John Cowperthwaite to restore Hong Kong from the devastating war – in political newspeak: “to stimulate it”.
As Cowperthwaite was thinking of a plan, he noticed something rather strange – the economy was fixing itself, without any form of government intervention. He noticed that the more he delayed his restoration plan that he had been ordered to implement, the richer the average Hongkonger got and that’s exactly what he sought to do – absolutely nothing. He let the invisible hand, which his fellow Scotsman Adam Smith had described, do all the dirty work.
In fact, he was so adamant on keeping the government away from getting involved that he had banned the state from even recording statistical data, claiming that it would be just another tool for politicians to use. When he stepped down as Financial Secretary of Hong Kong in 1971, this small colony was on its way to becoming richer even than Britain r on a per capita basis. So prosperous was Hong Kong that, in the years before being given back to China, its unemployment levels were below 2%. Hong Kong is considered to be the third financial center of the world today – alongside New York and London.
In conclusion, it is precisely the government’s response to the crisis that matters and not the size of the crash. The state ought to let the market re-adjust itself and weed out what caused the crisis in the first place naturally and allow capital to flow in directions that will stimulate natural growth.
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Image: Wikimedia Commons